Jack has $2000 that he wishes to invest for the next two years.One-year GICs are currently paying eight percent while two-year GICs are paying 12 percent compounded annually.Economists are predicting that interest rates will rise by the end of the year.What is the minimum interest rate Jack would need in year two,to make the one-year GIC better than the two-year GIC?

Question

Quizplus · Accepted Answer

For the one-year GIC, Jack would receive:
Year 1: $2000 x 0.08 = $160 in interest

For the two-year GIC, Jack would receive:
Year 1: $2000 x 0.12 = $240 in interest
Year 2: $2000 x 0.12 = $240 in interest, compounded

So the total amount of interest from the two-year GIC is:
$240 + $240/(1 + r), where r is the interest rate in year 2.

To find the minimum interest rate Jack would need in year 2 for the one-year GIC to be better, we can set up the inequality:

$160 > $240 + $240/(1 + r)

Simplifying this inequality, we get:

0.04 > 0.12/(1 + r)

1 + r > 3

r > 2

Therefore, the minimum interest rate Jack would need in year 2 to make the one-year GIC better is 16%. The only option that is close to this is 16.2%, so the answer is B.

Jack Has $2000 That He Wishes to Invest for the Next